Friday, February 12, 2010

Volcker: I Have Only Just Begun, I Want a Resolution Authority, New Regs for Mutual Funds, I am Going Global, and I Am Going to Crush Goldman Sachs

In an extensive interview with FT's Chrystia Freeland, Paul Volcker, in his understated manner, clearly indicates he is a new major player in the Obama Administration and that he has big plans.

At first, I thought he was just being modest when he said of the Volcker Rule:
I think it’s important obviously, but [it's getting] more attention than it deserves. People think it’s the whole of reform.
No modesty here though, he really wants much more regulation.

At one point he says:
I think the important thing is we get the structure figured out right. This idea of a – get my terms right, the resolution authority I guess is what we’re calling it, which definitely needs legislation.

It is another key structural part of the approach, which kind of interacts with this restriction on proprietary trading tries to accomplish, is another big element as you know in the derivatives and how to handle derivatives and whether derivatives should be put in more clearer and established clearance or settlements procedures one way or another.

There are some other issues. Some of them are going to have to wait, like what we do about the mortgage market, which is a big structural issue. There’s an issue out there in my mind about what to do about money market funds, which can be taken care of to some degree by regulation and supervision, but I think that may require some legislation, too.

So it all fits together hopefully in a package. Everybody’s been talking about capital requirements, leverage restrictions, liquidity requirements, which is all important, too, but that’s in the area of supervision.
Volcker is really thinking big, very big.

And, he does want to crush Goldman:
FT: If the Volcker rule were to be enacted, should a financial institution be allowed to give out its bank holding company status to evade the Volcker rule? Goldman Sachs comes to mind as –

PV: Well, I think any organisation would have to make up its mind. They want to be a bank, be a bank holding company, have access to the Federal Reserve, have access to deposit insurance, then they’ve got to follow the rules for banks.

If they don’t want to follow the rules for banks then they shouldn’t have a banking charter. It’s as simple as that. Pretty simple.
He saying here that Goldman will be ripped apart and only part of Goldman will survive and even if Goldman chooses not to be a bank holding company, they are still going to be harassed:

FT: And you think it would be okay for financial institutions to say ‘Right, with these new rules of the game with the Volcker rule we choose not to have bank holding company status?’

PV: Yes, absolutely, but that doesn’t mean they’re going to escape from all oversight and regulation. The administration has proposed from the beginning that if you have a large, systemically sensitive institution you’re going to be subject to some oversight. You’re going to be subject to some capital restraints, some leverage restraints, liquidity provisions. So you don’t escape.

If you’re really big and potentially your failure would be very disturbing, you’re going to have some oversight. So you don’t escape all the oversight, but you escape – escape maybe is not the right word. You’re not going to have the special privileges of a bank.

You can’t, mind you, combine the special privileges of a bank with unrestricted proprietary activity. They don’t mix.
Volcker is also clearly talking global, one world order type stuff:
FT: One criticism that we’ve heard particularly from the banks of your approach is it would limit the competitiveness of American institutions in the world. What’s your response to that?

PV: Well first of all, obviously it’d be desirable. We get an international consensus on this point and I don’t think that’s at all impossible and as chairman Dodd said actually when he introduced the hearing the other day, he says, ‘I’m favorably inclined toward this, but as I said in my statement it ought to be internationalised.’

And he made a very sensible point that if it’s going to become a general consensus around the world, the United States is going to have to take the lead.

I absolutely agree with him on that that the United States has to be out there making this case and I think there’s a lot of latent support for it, I tell you, in the rest of the world.
And if I was at Goldman, I would clearly be concerned about this. Lloyd Blankfein has been cut out of the loop:

FT: Sorry to interrupt you, Mr Volcker. Have you spoken directly to the leaders of those five big banks about the Volcker rule? Have they been in touch with you to talk to you about it?

PV: I have talked to some and not talked to others. Some of them come to me. Yeah.

FT: What has happened in those conversations?

PV: I frankly think when you – I shouldn’t make judgments, but the amount of noise in the press and the seeming opposition, I think there’s a lot more understanding of the leadership of these institutions as to what it’s all about and what it means and is sometimes reflected in the press, with all due respect to the press.

FT: A lot of the focus in this press attention has been on what the implications of the Volcker rules would be for Goldman Sachs. Have you talked to Lloyd Blankfein about them?

PV: I haven’t talked to him in recent months anyway. I’ve had no communication with Mr Blankfein, no.


  1. This may mark the beginning of capital flight out of the US.

  2. Capital flight would occur but there's no place to go. With economic shankopotumuses like Volcker springing up around the world its turing into a prehistoric WASTELAND.